How to Report Cryptocurrency on Taxes?

How to Report Cryptocurrency on Taxes?

written by John Murphy | December 27, 2022

Tax is a challenging part for investors. When cryptocurrency first came to light and users made good returns, tax authorities started bothering to bring gains from cryptos into the tax net. With years passing by, income from the crypto trade is now taxed; thus, many users are looking for how to report cryptocurrency on taxes.

There are quite a few ways of making profits from cryptocurrency, and even trading one crypto for other is a taxable event. Additionally, you must pay tax upon realizing a gain on digital assets such as NFT

However, keeping a record of income is vital, as you have to report them to tax authorities. While failing to do so, you may end up paying costly penalties. Do not even think of making an honest mistake in keeping a complete trail of gains from the crypto business.

So, through this guide, we will help you understand and report crypto taxes.

A step-by-step Guide to Report Cryptocurrency on Taxes

Like gains and losses from investing in stocks, crypto gains and losses work the same way. So, there is a method for reporting such payments, which we will mention in the coming lines.

There are five steps you should follow that how to report cryptocurrency on taxes.

  • Calculate crypto losses and gains
  • Complete IRS Form 8949
  • Record totals from Form 8949 to the Schedule D
  • Include all crypto incomes
  • Finish tax return

Let us now walk through each step in detail.

Calculate Crypto Gains and Losses

You will make capital gains or losses each time you trade crypto. Such disposal events include but are not limited to the following:

  • Selling cryptocurrency for fiat money
  • Buying services or goods with cryptocurrency
  • Trading cryptocurrencies

So, the next part is calculating the gain or loss on a particular transaction. It is not difficult; you can get cryptos’ prices (buying and selling).

Here is a formula:

Capital Gain/Capital Loss = Value at the Time of Sale – Value at the Time of Purchase

For instance, Mr Jack buys 1 Ethereum for $2500, and after one month, he sells 1 Ethereum for $3500. Thus his capital is $1000, which he has to mention on Form 8949.

Unfortunately, these calculations are only sometimes so simple. An active crypto trader usually has thousands of transactions in a year; therefore, keeping track of each trade takes time and effort.

However, for your ease, many crypto exchanges offer tax software that can calculate capital gains on thousands of transactions in seconds.

Complete IRS Form 8949

IRS Form 8949 is used for reporting capital gains from the sale or disposal of capital assets, including cryptocurrency. In addition to mentioning capital gains on form 8949, the following information is also required on each transaction:

  • Description of the sold property (a)
  • Date of acquisition of the property (b)
  • Date of sale or disposal of the property (c)
  • Proceeds from the sale (fair market value) (d)
  • Cost basis for purchasing the property (e)
  • Gain or loss (h)

An important point to remember is always to mention capital losses you have incurred during the tax year; after all, who would prefer to avoid getting a tax benefit for reporting capital losses? That is right; capital losses can offset capital gains up to $3000 of personal income.

Record totals from Form 8949 to the Schedule D

Once form 8949 is complete, take the total net gain or loss and include it on Schedule D.

Schedule D is the report that contains capital gains or losses from all sources. In addition to capital gain from cryptocurrency, you can gain from other businesses, estates, and trusts.

Include Crypto Income

There are scenarios where you earn cryptocurrency from mining, referral bonuses, staking, or through work. If you recognize incomes from such cryptos, you still need to include such revenues in your overall cryptocurrency gain calculation.

The tax authorities have designed different schedules for different crypto incomes. So, you need to understand and divide crypto incomes as per the below schedules:

  • Schedule 1: Crypto earnings from airdrops, forks, or other wages and hobby income become part of Schedule 1 as additional income.
  • Schedule B: Interest reward or income from staking cryptos becomes part of Schedule B.
  • Schedule C: Crypto earnings from the business, like receiving payments for a job or mining operations, are treated as self-employment and are thus reported in Schedule C. However, in this scenario, you are eligible to deduct electricity costs.

Complete Tax Return

After completing form 8949 by including your crypto income, you can meet other parts of the tax return. Once you are done reporting further gains, you can submit your tax return to the IRS.

So, this is how to report cryptocurrency on taxes.

Frequently Asked Questions

Is cryptocurrency income taxable?

Many countries over the years have brought income from cryptocurrency under the tax net. So, you have to pay taxes, usually categorized as capital gains.

Are losses from crypto trade adjustable against capital gains?

Yes! You can adjust a total of $3000 capital losses from crypto trade against your capital gains.

What will happen if I do not report cryptocurrency on taxes?

Not reporting cryptocurrency on taxes is a tax evasion act. You will have to pay extra penalties, reaching a $100,000 fine and five-year imprisonment.

Parting Thoughts

Since cryptocurrency gain has fallen under the tax net, users have been looking for methods to report cryptocurrency on taxes.

We covered the topic in detail, as tax authorities treat crypto gains as capital gains. So, it would help if you calculated capital income by subtracting the sale price from the buying price. Subsequently, sum up all gains or losses from transactions made through the year to report in the form 8949.

Additionally, you have the liberty to minus capital losses, if any, made from cryptocurrency trade as high as $3000. The rate of applicable tax is different for the nature of income from crypto, as there are multiple ways of making income from them. 

That concludes our discussion for how to report cryptocurrency on taxes. We hope you are now well-versed and can file your tax return without the help of an expert.

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